Business group wants Illinois income tax hike, spending cuts to fix state finances

Jose M. Osorio / Chicago Tribune

Frederick Waddell, chairman and CEO of Northern Trust Corporation, speaks about a report from the Civic Committee in which they are recommending tax hikes to deal with the state budget problem. Looking on is Jay Henderson, retired vice chairman at PricewaterhouseCoopers LLP.

Frederick Waddell, chairman and CEO of Northern Trust Corporation, speaks about a report from the Civic Committee in which they are recommending tax hikes to deal with the state budget problem. Looking on is Jay Henderson, retired vice chairman at PricewaterhouseCoopers LLP.

A prominent business leaders' group on Thursday called for an income tax hike on corporations and individuals coupled with spending cuts in state government to dig Illinois out of the red.

A task force of the Civic Committee of the Commercial Club of Chicago cited increasing concerns "about the deterioration of Illinois' attractiveness as a place to live and work, as well as its reputation among investors," in concluding the state needs to raise $10 billion a year over the next five years to restore its financial health.

The group envisions $2 billion in savings by cutting state government expenses on operations, employee health care and pensions. The remaining $8 billion would come from a series of tax increases, including raising the corporate tax rate from 5.25 percent to 9.5 percent and raising the individual rate from 3.75 percent to 5 percent. That's where it was before a 2011 temporary income tax hike expired just before Republican Gov. Bruce Rauner took office and the stalemate began months later.

A 2014 study commissioned by the Illinois Chamber of Commerce and Taxpayers Federation of Illinois found that about two-thirds of corporations in Illinois don't pay corporate income tax. Ninety-five percent of those companies also reported zero or negative federal taxable income.

Additionally, the business group wants to extend the state income tax to apply to retirement income, expand sales taxes to some consumer services, and eliminate some tax exemptions for people who make more than $50,000.

The group recommends using the new money to close the state's $7 billion budget deficit, pay down the bill backlog and then establish a rainy-day fund of at least $4 billion. After that, they say, the state should focus on paying down its $130 billion unfunded employee pension liability.

At the same time, the group wants to see elimination of the state's tax on multimillion-dollar inheritances, which it estimates would cost $320 million a year. And it wants changes to the rules governing the state's workers' compensation insurance system to make the program less expensive for employers. That's one of the major pieces of Rauner's economic agenda.

Mayor Rahm Emanuel praised the group's "honest report," but did not specifically endorse the ideas. The offices of Rauner and Democratic House Speaker Michael Madigan had no comment Thursday.

The recommendations should be taken together, said Frederick Waddell, the Civic Committee chairman and CEO of Northern Trust Corp.

"The approach is a long-term, comprehensive set of reforms that will put Illinois in a much better position," Waddell said. "I personally would pay more taxes if I felt that the state was going to be in a better position to compete going forward."

Jay Henderson, a retired vice chairman of PricewaterhouseCoopers LLP and chairman of the Civic Committee's tax policy group, said the ideas were aimed at bringing Illinois more in line with other states and eliminating uncertainty.

"We think that the combination of these proposals together could create a long-term economic plan that is credible, that could remove, in most cases, the uncertainty around the future of the state," Henderson said in an interview with the Chicago Tribune.

Still, taxing retirement income — which is done in most states that have an income tax — and eliminating the estate tax — which doesn't exist in most states — both are ideas that could prove politically challenging in Springfield. Older people tend to vote in higher numbers, and taxing their retirement income risks a backlash.

Waddell said the group didn't take politics into consideration.

"We really tried to say, 'What would be most impactful?'" Waddell said.

The recommendations come as politics has ground the budget-making process to a halt. The Republican governor and Democrats who control the General Assembly remain locked in a stalemate that's gone on for 23 months. The situation has caused disruption of safety net programs for those in need, starved colleges and universities of cash, and caused the unpaid-bills pile to reach an unprecedented $14.3 billion.

The Civic Committee is an elite business group whose membership list reads like a who's-who of Chicago business and politics. Among its members: Citadel CEO Ken Griffin, who recently gave $20 million to Rauner's re-election campaign; and J.B. Pritzker, an heir to the Hyatt Hotel fortune who is vying for the Democratic nomination to challenge Rauner in 2018. Rauner and Mayor Rahm Emanuel are honorary members. Before he became governor, Rauner led the organization's education committee.

The group's Tax Policy Task Force, which came up with the state budget recommendations, skews more in favor of Democrats. Combined, the task force's 11 members have contributed more than $534,000 to Emanuel, $54,000 to Speaker Madigan, and $26,300 to Rauner's campaign committee. Much of Emanuel's haul has come from Michael Sacks, the mayor's confidant and top campaign donor.

Henderson said the task force members were selected "to ensure that we had a diverse set of views on the committee." The group's recommendations were reviewed by the entire Civic Committee membership, which endorsed the report, Henderson said. Legislative leaders and the governor's staff also were looped in on the group's ideas.

Some of the Civic Committee proposals mirror what the Senate has been trying to reach agreement on to strike a budget deal. A spokesman for Democratic Senate President John Cullerton said the Senate Democrats "appreciate the Civic Committee weighing in and hope Gov. Rauner will listen."

At the crux of the budget stalemate has been the reluctance of both Republicans and Democrats to take the blame for raising taxes. On Tuesday, Rauner again tried to distance himself from talk of a tax hike, and he specifically criticized the idea of raising taxes to the level now being advocated by the Civic Committee.

"If the majority in the General Assembly refuses to make sufficient cuts to balance the budget, then their answer — Speaker Madigan said it 18 months ago, he wants to do a meaningful income tax hike," Rauner said, referring to Madigan's December 2015 assertion that income tax rates should return to where they were before the rollback.

"The only way we can pay our debt down, the only way we can pay it down, is through economic growth," Rauner continued. "We cannot tax our way to pay it down, and we cannot purely cut. We've got to grow."

Missing from the wide-ranging set of recommendations was any mention of property taxes, which are a key driver of costs for Illinois homeowners and businesses. A property tax freeze has been one of Rauner's top requirements in return for signing off on tax increases.

The Civic Committee group noted in its report that if the spending reductions it advocates were to hit local governments, it might cause cities or school boards to try to raise money through property tax hikes. Waddell and Henderson said that in addition to raising revenue and cutting spending, they decided to focus their recommendations on three areas that they thought would most impact the jobs climate in Illinois, and the property tax issue was not among them.

The group recommended consolidating local government as well as changing the funding formula and increasing state aid for elementary and secondary education to better fund schools. Rauner also has pushed those ideas.